Post-FOMC USD Decline Nearing Completion?
- See the June forex seasonality report.
A projected slower interest rate hike path by the Fed has weighed on the US Dollar the past two days. In March, the FOMC's dot plot suggested that 77-bps of rate hikes would be announced in 2015; the June update forecast only 57-bps of rate hikes. So with policymakers becoming less hawkish - there's the possibility of one- to-two rate hikes this year, as opposed to two-to-three expected just three-months ago - traders have removed any short-term bullish US Dollar trades that were contingent on a more aggressive Fed (say, expressing the possibility of a July rate hike).
The US Dollar decline on the back of shifting rate expectations may have run its course, with several USD-pairs reaching significant technical levels before turning back. Headed into the meeting, the implied probability of a rate hike in 2015 was only greater than 50% for December 2015; the market has effectively been pricing in only one rate hike occurring in 2015 anyway, before the FOMC released its updated view. In reality, the Fed is catching up to the market, as the market is continuously pricing and repricing information.
If anything, it seems the Fed is a touch behind the eight ball but seems to be following economic developments rather closely. Seeing as how the Fed has only recently caught up to the market's view that the Fed's tightening cycle will be flat due to the state of the economy - hikes will be small and gradual as the economy limps forward - the only potential catalyst for a stronger US Dollar will be stronger US economic data.
Unfortunately for today, there aren't any major US data releases on the calendar. However, next week there are many; and in the interim, several major USD-pairs are testing significant technical levels that could determine the viability of recent breakout attempts. See the above video for technical considerations in EURUSD, AUDUSD, GBPUSD, USDJPY, and the USDOLLAR Index.
--- Written by Christopher Vecchio, Currency Strategist
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